Tuesday, April 10, 2012

On April 5th, I made the seemingly absurd claim that "problem isn't that [Paul Krugman's] solutions are old, failed policies from the 1930s, but that they are old, failed policies from the 13th century" in reference to the inflation created by Gaikhatu Khan's paper currency in 1294.

Absurd, one might well have concluded. Crackpottish. Surely it must be exaggeration for rhetorical effect, at the very least.

And yet, on that very same day, Paul Krugman published an article in the New York Times entitled Not Enough Inflation, in which he declared:

[L]arge parts of the private sector continue to be crippled by the overhang of debt accumulated during the bubble years; this debt burden is arguably the main thing holding private spending back and perpetuating the slump. Modest inflation would, however, reduce that overhang — by eroding the real value of that debt — and help promote the private-sector recovery we need. Meanwhile, other parts of the private sector (like much of corporate America) are sitting on large hoards of cash; the prospect of moderate inflation would make letting the cash just sit there less attractive, acting as a spur to investment — again, helping to promote overall recovery.

In short, far from fearing that more action against unemployment might lead to an uptick in inflation, the Fed should actually welcome that prospect.